London Bridge Is Falling Down
The spectacularly shocking fall of FTX has been covered by the press from left to right, as regulators are descending on the company like SWAT teams.
As I write this, Bitcoin is down to $15.8K, so below $16K even. We thought that now that the Celsius debicle has died down, we were finally finished with market crashes for now, but here we are.
How was this even possible?
Many people were asking themselves this question. “How could a crypto kingpin fall down so suddenly, together with his exchange, when they seemed to be just fine months earlier?”
The answer to this question was found long before Satoshi even invented Bitcoin.
The Enron scandal
Do you know who this guy is?
He is Kenneth Lay, the founder of bankrupt energy titan Enron and its CEO when it imploded. He was responsible for perpetrating most of the accounting fraud that fooled investors into thinking that the company was just fine, during a time when they had billions of dollars in liabilities.
Sounds familiar, right?
Because FTX also has billions of dollars in liabilities and yet managed to fool people into believing it was liquid, by artificially inflating its own token — the FTX Token (FTT).
Lay was indicted in 2004. He was to serve jail time but he died in 2006 before his sentencing.
How did the FTX Token crash?
This is actually pretty funny because there were people who blamed Binance for this whole thing initially (disclaimer: I do not hold any crypto on Binance or FTX).
It all started when Binance found out about how one company was holding over $14 billion of FTT — most of its supply, and they, considering that they held a huge bag of FTT that FTX paid them in 2 years back, decided to liquidate it:
In this thread, Changpeng Zhao (the Binance CEO and also known as CZ) stated that Binance will liquidate their FTT in a way that minimizes market impact.
Well apparently, that part failed horrendously, because it triggered a wave of people selling the FTX token, causing it to crash from $70 to just $4 or $3.
Apparently, FTX also held a huge reserve of FTT, because it was having enormous difficulty processing user withdrawals shortly afterward:
SBF is Sam-Bankman Fried, the founder and now-former CEO of FTX.
We will get back to the proposed acquisition in a minute.
Who was the other company holding enormous amounts of FTT?
The other company was none other than Alameda Research, a sort of trading company and SBF’s other business that he operated alongside FTX.
You won’t find this in the Twitter thread, but there are media reports that he bailed out Alameda Research with $10 billion of FTX consumer deposits.
You should never spend your user deposits. They should be sitting in a cold storage.
Alameda Research made some very foolish decisions such as paying to acquire bankrupt lending firm Voyager’s assets, and also BlockFi and some others, and lost a ton of money on those investments.
SBF made the transfer from FTX without any employee’s knowledge using a backdoor planted in the accounting software of FTX.
This “Wolf of Wall Street” here was recklessly spending FTX money on advertising and sports sponsorships, until their liabilities were over 9 times their available assets. Alamedia Research claims that they have more assets, but recent numbers put them at $10 billion assets against $50 billion liabilities — that is actually worse than initially reported because of the extra liabilities.
FTX asked Binance for help
Before it filed for Chapter 11, FTX asked (I view it as begging) Binance to save them by acquiring their business so they could resume withdrawals.
Oh the irony. Buying up a bunch of businesses only to sell out to your biggest competitor.
Binance signed a particular memorandum of intent that allowed it to walk out of the deal “at any time”. Which is exactly what they did the next day:
Doom Eternal
With their only hope of salvation extinguished — they also made paltry attempts to convince Kraken and OKX to rescue them — FTX and FTX.US filed for bankruptcy on Novmber 11, 3 days ago from this post. Alameda Research has also filed for bankruptcy. SBF resigned on the same day and put the bankruptcy laywer of Enron (surprise surprise) as the acting CEO of the company.
I mentioned that FTX.US also went bankrupt. If you read SBF’s tweet about it a few days ago, you would’ve thought otherwise:
This means Sam-Bankman Fried lied about the financial health of FTX.US, claiming it was alright, while it staggered with withdrawals shortly after FTX ran into trouble.
Oh, and FTX halted all withdrawals, and both exchanges got “hacked” the same day as the bankruptcy — which most people speculate was an insider stealing funds from the exchanges.
I’m not even going to start mentioning how they left Bahamas withdrawals open for some time which caused a flurry of whales bribing FTX staff to change their KYC to Bahamas so they could withdraw their fortune.
FTX and its US arm are now under investigation by multiple regulators. There are also rumors that SBF is under house arrest in the Bahamas as he and other disgraced execs try to escape to Dubai. Not sure how that is going to help them if they are just going to be sent back to the US.
How Enron-like of all this.
“I fucked up”
You did, haven’t you?
This is coming from the guy who recently made a podcast: “How to Prevent the Next Terra and 3AC” with Unchained, days after the story broke that FTX had a solvency crisis. Here, you guys have a look yourself:
How about not collateralizing your own token, Sam?
The truth is, I don’t care so much about exchanges going down. Or this exchange in particular. Or Binance for that matter. Neither of them want to onboard Americans living abroad, so I am considering so use Kraken, which is friendlier to people like us.
I feel bad for everyone who still has money trapped in FTX, but I have a feeling this is going to be like Mt. Gox.
And the Mt. Gox coins haven’t even been paid to creditors yet. I suspect that FTX users will have a long time to wait.
Let this be a periodic reminder for you to not store your crypto on exchanges, and if you have large amounts of them, withdraw them to a hardware wallet now.
Tango down
So this has caused another bloodbath in the crypto market, hammering the Bitcoin price and that of other altcoins to lows never seen since the 2020 halving. But this is not Celsius’ or Do Kwon’s fault this time. In particular, it is not crypto’s fault for existing and being inherently volatile (Besides, if Tesla crashed, you wouldn’t blame the stock market for that, would you?). The blame for this crash rests exclusively on SBF.
The difference is that even the sports industry and politicians have been smeared in this crash thanks to SBF’s reckless advertising.
The crypto market will recover from this crash. But we will have to wait until FTX’s financial vomit is purged before we see a recovery back to normal levels.
Exchanges should be prohibited from collateralizing their own token, to prevent them from using it to manipulate their own balance sheets.
Finally, here is a random image of London Bridge, just because I said it’s falling down:
What do you think about FTX’s sudden downfall? Let me know in the comments below.
